Lincoln Educational (LINC): Buy, Sell, or Hold Post Q3 Earnings?

Lincoln Educational currently trades at $26.03 and has been a dream stock for shareholders. It’s returned 340% since January 2021, blowing past the S&P 500’s 83.4% gain. The company has also beaten the index over the past six months as its stock price is up 15.8% thanks to its solid quarterly results.

Is now the time to buy Lincoln Educational, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Lincoln Educational Will Underperform?

Despite the momentum, we're sitting this one out for now. Here are three reasons why LINC doesn't excite us and a stock we'd rather own.

1. Weak Growth in Enrolled Students Points to Soft Demand

Revenue growth can be broken down into changes in price and volume (for companies like Lincoln Educational, our preferred volume metric is enrolled students). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Lincoln Educational’s enrolled students came in at 18,244 in the latest quarter, and over the last two years, averaged 10.8% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Cash Burn Ignites Concerns

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

While Lincoln Educational posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, Lincoln Educational’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 7.6%, meaning it lit $7.62 of cash on fire for every $100 in revenue.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Lincoln Educational’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of Lincoln Educational, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 33.8× forward P/E (or $26.03 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

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